As you are aware that the Insurance Act,1938 is notified on 26th February,1938 and main objective was to consolidate and amend law relating to business of Insurance. Since there were many companies engaged in the business of insurance in pre-independence period and there was no legislature to control activities of insurance companies and regulate them.
In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies.
In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business.
An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.
The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices.
In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.
In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1st January, 1973.
Total 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1st 1973.
THE INSURANCE LAWS(AMENDMENT) ACT,2015
The Government of India has liberalised its economic policies after 1992 and allowed inflow of Foreign Direct Investment(FDI) in India in various sectors. The initial FDI in insurance sector was allowed to @26% and thereafter increased upto @49%. The insurance industry, business houses, CII and other world forums has requested the government to amend old Insurance Act,1938 to incorporate new provisions to cope with changing environment and necessities.
The passage of the long overdue amendment, including the increase in permitted foreign investment from 26% to 49% sets the stage for new entrants and consolidation in the insurance industry. However, the condition requiring Indian control of insurance joint ventures will be a key consideration going forward.
The long overdue Insurance Laws (Amendment) Act, 2015 was enacted on 23 March, 2015, in one of the first legislative actions of India's new government led by Narendra Modi. The amendment was first presented before parliament as far back as 2008, but failed to get traction because of the legislative log-jam in the intervening years.
The amendment also underwent a few material changes since it was first introduced, such as the prescription for Indian control over insurance joint ventures. However, the head-line objective of increasing the ceiling on foreign investment from 26% to 49% has been achieved.
HIGHLIGHTS OF THE INSURACE LAWS (AMENDMENT) ACT,2015
1. Foreign investment ceiling hiked from 26% to 49%
This ceiling applies to the "paid-up equity capital" of an insurance company. The extent of foreign investment is calculated on the same basis as before, i.e., on a 'proportionate' basis.
Thus, for example, if a resident shareholder (R) holds a 75% stake in an insurance company (I), and a foreign investor (F) in turn holds 49% of R, then the extent of foreign investment in I equals 75% X 49% = 36.75.
2. However joint ventures must be Indian controlled
This is a new requirement imposed by the Amendment, while raising the ceiling on foreign ownership from 26% to 49%. Unfortunately, there is no bright-line definition of what is adequate to satisfy this requirement. As long as this is the case, the determination of whether an insurer is Indian controlled would have to be made on a case-to-case basis. It is clear from the amendment that 'control' is viewed more broadly than simply owning a majority of voting shares or appointing a majority of directors, and that rights under a shareholders agreement will be factored in.
3. Alternative types of capital instruments (such as non-voting preference shares)
Before the amendment, insurance companies were only permitted to issue equity / ordinary shares with a uniform par value. The amendment, however, permits insurance companies to issue "such other form of capital as may be specified by the regulations." Permission to issue preference shares or debentures, which do not carry voting rights, would open new avenues for an insurer to raise more foreign capital without impacting its compliance with the 49% ceiling on foreign ownership (which only applies to equity capital) or the requirement for Indian control.
4. Indian partner no longer required to divest stake exceeding 26% after 10 years
Previously, the Insurance Act required the Indian 'promoter' of an insurance company to sell down its stake in excess of 26% within 10 years of commencing business (with the objective of discouraging concentrated ownership of insurance companies). However, given the limit on foreign ownership (previously, 26%), this left the Indian promoter with little option but to attempt a listing or induct additional partners.
5. Health insurance will be regulated as a separate class of insurance
Health insurance is currently regulated as a part of the general insurance business. The amendment now proposes to regulate health insurance on a stand-alone basis. The object behind this is to give health insurance business priority through a more focused regulatory regime.
6. Foreign reinsurers permitted to operate out of wholly owned branch offices
Previously, only domestic insurance companies were permitted to sell reinsurance. India's largest state owned general insurance company (GIC) is currently the only active reinsurer. The government has now dispensed with the requirement for reinsurance business to be conducted only through a company incorporated in India.
7. More powers for insurance regulator, decisions now appealable
Under the amendment, the Insurance Regulatory and Development Authority of India has been granted greater flexibility to regulate insurance companies through its rule making powers on matters such as management fees, commissions and composition of the insurance company's investment portfolio. These were earlier hardwired into the provisions of the Insurance Act itself. Simultaneously, the appeals' process for quasi- judicial and administrative rulings of the authority has been streamlined by designating the securities appellate tribunal as the appellate forum. Earlier such appeals lay only to the central government.
Considerations for Investors
1. Previous joint ventures were based on the assumption that the ceiling on foreign investment would be increased from 26% to 49% in the near future. During this transition period, the Indian partner in the JV was expected to fund a substantial portion of the foreign partner's capital commitment, and was compensated with a 'fee' for the time value of its money. Alternatively, the foreign partner was expected to contribute a disproportionate share (in excess of its 26% shareholding) of JV's capital until the ceiling on foreign ownership was raised (at which point, the capital structure would be unwound). As it turned out, it took much longer than expected for the ceiling on foreign ownership to be raised to 49%, which placed considerable stress on the capital structure of these JVs.
2. Going forward, the capital structure of an insurance JV cannot be based on the assumption that the 49% ceiling will be raised in the foreseeable future. Thus, the Indian partner (s) must have deep enough pockets to fund up to half of the JV's future capital requirements on a sustained basis. That said, there is now potential for the foreign partner to meet funding gaps through non-voting preference shares (subject to specific rules, which are awaited). Needless to say, the economics of such preference shares would need to make sense.
3. The new requirement for insurance companies to be Indian controlled imposes constraints on governance rights, which a foreign investor would normally expect in a 50:50 joint venture. For instance, in another context in the past, the government has taken the position that extensive veto rights / reserved matters were a form of 'negative control'. Thus, foreign investors would need to prioritize key governance rights and reserved matters to get most 'bang for their buck'. The idea would be to get maximum leverage without tipping the scales for the control test.
4. Foreign investors should also look for additional leverage (and economics) by segmenting the value chain in the insurance business, and outsourcing functions to wholly owned affiliates. IRDA guidelines, which regulate the nature of activities that can be outsourced, will need to be factored in.
5. The possibility of non-voting securities, restrictions on control by the foreign JV partner and capital constraints of the Indian JV partner may open the door to private equity / financial investors.
6. Capital constraints of Indian participants, restrictions on foreign control and those looking to exit may set the stage for consolidation in the industry.
THE ACTS, GOVERNING REGULATIONS AND PREPARATION OF ACCOUNTS OF INSURANCE COMPANIES ARE;
The Companies Act,2013;
The Insurance Laws( Amendment) Act,2015;
The IRDAI Act,1999;
The Insurance Act,1938;
The Insurance Rules, 1939;
The IRDAI( Preparation of Financial Statement and Auditors’ Report of Insurance Companies) Regulations,2000/2002;
The Foreign Exchange Management Act, 1999.
The Accounting Standards issued by ICAI.
In this article we are going to discuss amended provisions of the Insurance Laws ( Amendment) Act, 2015 related to preparation of financial statements of General Insurance Companies.
MASTER CIRCULAR ON PREPARATION OF FINANCIAL STATEMENTS: GENERAL INSURANCE BUSINESS
The Authority in order to streamline the preparation of the financial statements of General Insurance Business, had issued various Circular/Guidelines. In order to enable the Insurers to have a one stop document of all such directions issued in connection with preparation of Financial Statements, a Master Circular has been prepared.
This Master Circular consolidates all Circulars issued by the Authority up to 30th Sep., 2012 and will have the effect of superseding such earlier Circular(s) issued.
The Master Circular covers all Performance Ratios, mandated through “Public Disclosures” vide IRDA Circular Reference IRDA/F&I/CIR/F&A/012/01/2010, dated 28th January, 2010 and the Master Circular shall be effective from 5th Oct., 2012.
Every General insurance/Reinsurer shall comply with the requirements of Schedule B of IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002 (the Regulations).
Section 11(1A) of the Insurance Act, 1938 requires all insurers to prepare at the expiration of each financial year, with reference to that year,
i) a balance sheet,
ii) a profit and loss account,
iii) a separate account of receipts and payments and;
iv) a revenue account in accordance with the regulations made by the Authority.
1.1 Compliance with the Requirements of the Accounting Standards Every Balance sheet, Receipt and Payments Account [Cash Flow Statement] and Profit and Loss Account [Shareholders’ Account] of the insurer shall be in conformity with the Accounting Standards (AS) referred to in section 211 (3C) of the Companies Act, 1956, to the extent applicable to the insurers carrying on general insurance business, except that:
i. Accounting Standard 3 (AS 3) – Cash Flow Statements – Cash Flow Statement shall be prepared only under Direct Method.
ii. Accounting Standard 13 (AS 13) – Accounting for Investments, shall not be applicable
iii. Accounting Standard 17 (AS 17) – Segment Reporting, shall apply to all insurers irrespective of the requirements regarding listing and turnover mentioned therein.
Modifications on the applicability of the AS are contained in Part-I of Schedule B of the Regulations 2002.
Compliance with the AS must be ensured while finalizing the Financial Statements.
1.2 Furnishing of Annual Financial Statements and other filings:
Attention is drawn to section 15 of the Insurance Act, 1938 which provides furnishing of the audited accounts and statements referred to in section 11 or sub-section (5) of the section 13 with the Authority within six months from end of the financial year.
As insurers are finalizing their annual accounts much earlier than the prescribed timelines, it is hereby directed that insurers shall file an advance copy of attested true copy of the annual financial statements within 15 days from the date of adoption of accounts by the Board
In the event, the accounts adopted by the Board are modified in the general meeting of the shareholders, the revised accounts duly signed as per the provisions of the Insurance Act, 1938 shall be filed with the Authority forthwith.
1.3 The Format of the summary of the financial statements for the last five years, wherever applicable and the performance ratios required to be furnished by the insurers as given at Annexure I & II.
2. ACCOUNTING AND DISCLOSURE REQUIREMENTS
2.1 Segment Reporting
As per the Regulations, all general insurers are required to prepare separate revenue accounts for fire, marine and miscellaneous business. Further, separate Schedules are required to be prepared for Marine Cargo and Marine – Others. In addition, in respect of miscellaneous business, separate Schedules shall be furnished for 1. Motor- Motor Own Damage, and TP, 2. Workmen’s Compensation/Employer’s liability, 3. Public/Product Liability, 4. Engineering, 5. Aviation, 6. Personal Accident, 7. Health insurance and 8. Others.
Any other sub-segment contributing more than 10% of the total premium of the insurer shall be shown separately.
The Authority requires the segments to be reported on the basis of line of business, and on the basis of business within and outside India. While giving the segment details previous year’s figures should also be given for all the segments.
2.2 Cash Flow Statement:
All insurers are required to furnish the Cash Flow Statement as per the Direct Method. The proforma is placed in the Annexure III
2.3 Value of investments as at the Balance Sheet date
Attention is drawn to Part I clause 6 (c) pertaining to Accounting Principles for preparation of Financial Statements under Schedule B which provides that listed equity securities and derivative instruments that are traded in the active markets shall be measured at fair value on the balance sheet date. Measurement for the purpose of calculation of fair value shall be the last quoted closing price on NSE. However, in case of any stock not being listed in NSE, the insurer may value the Equity based on the last quoted closing price in BSE.
2.4 Actuarial valuation of claims where claims period exceeds four years
The Regulations require all insurers to furnish the particulars of the claims made in respect of contracts where the claims payment period exceeds four years. Such claims are required to be recognized on actuarial basis. In such cases, a certificate from an Appointed Actuary as to fairness of liability assessment must be obtained, and the actuarial assumptions are required to be disclosed by way of Notes to the Accounts. A clear example of such a liability is payment arising out of long term disability. It is further clarified that the provisioning under this regulation has no relation to the time lag between the occurrence and settlement of a claim.
Such claims should be certified by the appointed actuary.
2.5 Treatment of Premium Deficiency
Premium deficiency arises when the sum of expected claim costs, related expenses and maintenance costs (related to claims handling) exceeds related reserve for unexpired risks.
The expected claim costs should be calculated and duly certified by an Appointed Actuary.
The insurers shall recognize the premium deficiency for all the segments including the segments of miscellaneous class of business. Any premium deficiency, in this regard, in any of these segments/sub-segments of business will have to be provided for by the insurer, irrespective of the possibility of no such deficiency arising on the overall basis. However, Insurers are not required to recognize premium deficiency on erstwhile motor pool and declined motor pool.
The basis of computation needs be disclosed under the notes of accounts. Premium deficiency shall be shown as a separate line item in the reportable segmental revenue account. The revised format of Revenue Account in placed at Annexure IV.
2.6 Unallocated Premium
Unallocated premium includes premium deposit and premium which has been received but for which risk has not commenced. It is to be shown under current liabilities.
2.7 Premium received in advance
Premium received in advance is the premium, where the period of cover sought incepts is clearly outside the accounting period and is shown under current liabilities.
2.8 Provisioning for diminution in the value of equity
Attention is drawn to Clause 6 (c) of Part I of the Schedule B of the Regulations. The Regulations require that the insurer shall assess on each balance sheet date whether any impairment of listed equity securities/derivative instruments has occurred.
Any impairment loss (i.e. other than temporary diminution in value) shall be recognized as an expense in the Revenue/Profit and Loss A/c to the extent of the difference between the re-measured fair value of the security/investment and its acquisition cost as reduced by any previous impairment loss recognized as expense in the Revenue/Profit and Loss Account. Any reversal of impairment loss, earlier recognized in Revenue/Profit and loss Account, shall be recognized in the Revenue/Profit and Loss Account.”
Insurer shall disclose its policy on recognition of impairment in notes to account.
2.9 Rural and Social Sector business
Schedule B Part II Point C (3) of the Regulations requires the percentage of sector wise business to be disclosed. Along with the total business and rural business, the social sector business underwritten by the insurer should also be furnished, indicating the number of policies issued and number of lives covered (both actual and percentages).
2.10 Contingent Liabilities
Underwriting Commitments Outstanding
Commitments to underwrite the subscription to a new issue of shares, but the liability for which is contingent upon the issue not being fully subscribed. (It is, however, clarified that insurers are presently not permitted to underwrite issues).
Re-insurance obligations not provided for
Obligations under reinsurance contracts with the insurer in respect of which, there are subsisting obligations as at the balance sheet date but for valid reasons, the insurer has not made any provision.
2.11 Provision for Free Look period
The insurers are required to evolve principles for provisioning for free look period based on assumptions and experience, duly certified by the appointed actuary.
2.12 Investments of Policy holders and Shareholders
While preparing the Balance Sheet, the insurers are advised to indicate, as far as it is feasible, Investments pertaining to Shareholders and Policyholders separately, in which case, the Investments Schedules shall be as under:
Schedule 8 Investments – Shareholders
Schedule 8a Investments – Policyholders
The income/losses accrued/capital gains/losses on the investments are to be credited/debited to the respective Revenue Account/Profit & Loss Account, as the case may be.
There shall not be any transfer from Policyholders’ Account to Shareholders’ Account on account of income/losses on investments.
However, in case of practical difficulties, the Board of Directors can take a view on the subject, and consistently follow the same. The policy on this matter should be spelt out in the Significant Accounting policies.
2.13 Alternate Risk Transfer Agreements (ART)
Some of the non-life insurers are entering into Alternate Risk Transfer (ART) agreements as a substitute to/form of re-insurance. A broad assessment of the types of agreements being entered into by the insurers indicates that while at best these arrangements may be a combination of reinsurance and financing arrangements, in other instances ART may be purely in the nature of a financing agreement.
Any ART arrangement has to be accounted for based on the principle of “Substance over Form”. If the agreement is in the nature of re-insurance coupled with financing arrangement, and the components are capable of separation, each element should be accounted for as per the Generally Accepted Accounting Principles (GAAP). However, in cases where the aforesaid components are not separable, the entire arrangement should be treated as a financial transaction and should be accounted for accordingly. All non-life insurers are required to account for the ART arrangements by looking into the “Substance over Form”, and account for the same as per the GAAP
2.14 Transfer of securities to Policy holders’ Account
Where securities are transferred to the policy holders Account, this should be at market price or amortized cost price, whichever is lower.
2.15 Allocation of Expenses
All expenses should be allocated between the Revenue/Profit & Loss Account on a rational basis. Basis adopted shall to be followed consistently. Basis of allocation shall be disclosed.
However, any expense which could not be allocated as above shall be apportioned based on the net premium of the company. Details of such apportioned expense shall be furnished in the notes to accounts.
2.16 Presentation of Service Tax / GST heads
The presentation of the Service Tax on Premium underwritten by the insurers is to be as under:
Under the Schedule on ‘Premium’ to be indicated net of service tax
Service Tax Expenditure/GST
Under the Schedule ‘Operating Expenses’ as “Service Tax A/c/Now GST ” at and Sl. No.14
Service /GST tax liability
Under the Schedule ‘Current Liabilities’ as “Service tax liability/GST ” under “Others”.
Service/GST tax unutilized Credit (If applicable)
Under the Schedule ‘Advances and other Assets’ as “Service tax unutilized credit/GST ” under “Others”
2.17 Profit on sale/redemption of investments – Income tax thereon
The exemption available to any other assessee under any clause of section 10 of the Income tax Act, 1961 (including clause 38 of section 10 regarding long term capital gains) is also available to a person carrying on non-life insurance business subject to the fulfillment of the conditions, if any, under a particular clause of section 10 of the Income tax Act under which exemption is sought. Clarification in this regard provided by the CBDT, Department of Revenue, Ministry of Finance is in placed at Annexure V.
3 GUIDELINES ON PRUDENTIAL NORMS FOR INCOME RECOGNITION, ASSET CLASSIFICATION, PROVISIONING AND OTHER RELATED MATTERS IN RESPECT OF LOANS & ADVANCES:
The guidelines are based on the RBI guidelines issued in this regard, duly modifying, keeping in view the industry specific requirements. Any item not covered below will be governed by the provisions as mandated by the RBI for banks.
3.1 Asset Classification
Adequate provision shall be made for estimated loss arising on account from/under recovery of loans and advances (other than loans and advances granted against insurance policies issued by the insurer) outstanding at the balance sheet date. Insurers shall classify their loans/advances into four categories, viz., (i) standard assets, (ii) sub-standard assets, (iii) doubtful assets and (iv) loss assets. Classification of assets into these categories shall be done taking into account ability of the borrower to repay and the extent of value and realizability of security
3.1.1 Standard assets
Standard asset is one which does not disclose any problem and which does not carry more than normal risk attached to the business. Such an asset is not an NPA. The insurer should make a general provision on Standard Assets of a minimum of 0.40 per cent of the value of the asset.
In respect of loans extended directly by insurers to sick units taken over by borrowers falling under the “standard” classification, the facilities of the transferee and merged units may continue to be classified separately, for a period not exceeding 24 months from the date of the takeover of the sick unit, after which the performance of the loans sanctioned to the borrower as a whole should determine their classification. In cases of reverse merger (i.e., take-over of a healthy unit by a sick unit) as well, the facilities of both the units may continue to be classified separately for a period of 24 months after which the combined performance may be taken for asset classification.
3.1.2 Sub-standard assets
Sub-standard asset is one which has been classified as NPA for a period not exceeding 12 months, e.g., an asset which has been treated as a NPA on 1st April, 2004, would be treated as a sub-standard asset only up to 31st March 2005
In case of time overrun for completion of project directly financed by insurers, the Boards of Insurers should decide based on valid grounds, whether the advance should be treated as standard asset.
An asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production, should be classified as sub-standard and should remain in this category for at least two years of continually satisfactory performance under the revised terms. The classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of the above condition.
3.1.3 Doubtful assets
A doubtful asset is one which has remained as NPA for a period exceeding 12 months, e.g., a loan facility to a borrower which is treated as NPA on 1st April 2004, would be treated as ‘doubtful’ from 1st April, 2005.
A loan classified as doubtful has besides the weakness inherent in that classified as sub-standard, with the continuing default makes the recovery in full, to be improbable. Here too, as in the case of sub-standard assets, rescheduling does not lead up gradation of the category of the asset automatically. Similarly a doubtful asset which is subject to rehabilitation and where the asset has been subsequently continually satisfactorily serviced for one year shall be graduated to a standard asset.
3.1.4 Loss assets
A loss asset is one where loss has been identified by the insurer or its internal or statutory auditors or by IRDA, but the amount has not been written off wholly. In other words, such an asset is considered un-collectible and as such its continuance as asset is not warranted although there may be some salvage or recovery value.
3.2 Overdue Amounts Interest/Principal
An amount, whether interest or principal, if it is not paid to the insurer on the specified date, is said to be over due. An asset is classified as an NPA if the interest and/or installment of principal remain overdue for more than one quarter.
3.3 Provisioning for Loans and Advances
Taking into account the time lag between an accounts becoming doubtful of recovery, its recognition as such, the realization of the security and the erosion in the value of security charged to the insurers, it is necessary that insurers make adequate provisions against sub-standard assets, doubtful assets and loss assets, as per the procedure outlined below:
3.3.1 Loss assets:
The entire asset should be written off. If the assets are to remain in the books for any reason, 100 per cent of the outstanding should be provided for.
3.3.2 Doubtful assets:
(a) 100 percent provision of the extent to which the asset is not covered by the realizable value of the security to which the insurer has a valid recourse and the realisable value is estimated on a realistic basis.
(b) Over and above item (a) above, depending upon the period for which the asset has remained doubtful, 20% to 100% provision of the secured portion (i.e., estimated realisable value of the outstanding) should be made on the following basis:
Period for which the asset has been considered as doubtful
% of provision
Up to one year
One to three years
More than three years
3.3.3 Sub-standard assets
i. A general provision of 10% of total value outstanding remaining substandard is required to be made including loans granted by the Central/State government.
ii. Loans granted under rehabilitation packages
In case of nursing finance granted by an insurer, the additional loan facilities sanctioned under the rehabilitation programme may be treated as a separate account and the performance assessed separately. Asset classification and provisioning in respect of such loan facilities as per the prescribed guidelines may be made only if the interest/principal payments remain due beyond one quarter.
It is clarified that the proviso has been included to take care of the existing portfolio of the insurers.
3.4 Defaults in repayment of principal
On account of various reasons, such as delays in project implementation, getting adequate working capital facilities, etc., repayment of principal may be delayed beyond the stipulated one quarter. The asset may continue to be considered as standard if the installments of the principal amount are rescheduled with the approval of the Board of the concerned insurer. This is subject to the condition that there can be only a one time re-schedulement and that the interest continues to be paid regularly.
3.5 Time Overrun:
In case of time overrun for completion of project directly financed by insurers, the Boards of Insurers should decide based on valid grounds, whether the advance should be treated as standard asset.
3.6 One Time Settlement (OTS)
(a) In respect of loan facilities extended to sick units (under nursing programmes or otherwise) taken over by borrowers falling under the “standard” classification, the facilities of the transferee and the merged units may continue to be classified separately for a period not exceeding 2 years from the date of takeover of the sick unit, after which the performance of the loan facility sanctioned to the borrower as a whole should determine their classification.
(b) Sometimes insurers enter into one time settlement (OTS) of their dues with a new owner. In cases where a sick unit has been merged with a healthy and strong unit and where payments are being made as per the OTS scheme, the asset in respect of the merged unit may be considered as standard without waiting for a period of 2 years for upgradation from sub-standard to standard asset. However, such cases should be approved by the Board of the concerned insurer.
3.7 Units Enjoying More than One Loan Facility
In case of borrowers who have been granted more than one loan facility by the insurer, all the dues from them will have to be treated as NPAs if 50 per cent of its total interest and/or principal dues from all loans extended to it remain overdue for more than one quarter.
3.8 Government Guaranteed Loans
Loans or other credit facilities backed by Central/State Government guarantees should be treated on par with other assets for income recognition and provisioning. However, in respect of loans backed by Central Government guarantee, such loans shall be treated as NPA only when the Government repudiates its guarantee when invoked.
3.9 Income Recognition
Income in respect of any asset classified as NPA shall not be recognized unless realized. However, any adjustment towards overdue interest against any fresh/additional loan shall not be considered as realized.
4 FINANCIAL DISCLOSURES
Part II of Schedule B of the Regulations stipulates the disclosure requirements which are required to form part of the financial statements. In addition to this, the following disclosures are also required to be made.
4.1 Assets subject to restructuring
The following information is required to be disclosed as Rs. in lakhs:
a. Total amount of loan assets subject to restructuring
b. The amount of standard assets subject to restructuring
c. The amount of sub-standard assets subject to restructuring
d. The amount of doubtful assets subject to restructuring
4.2 Disclosure of Gross Income
The Revenue and Profit & Loss Accounts of the insurers contain line items pertaining to “income from investments”. The disclosure of income from investments should be indicated as required under the regulations.
4.3 ‘Contents of Management Report’ point 10 requires disclosure of ‘Ageing of claims indicating the trends in average claim settlement time during the preceding five years’, The required details are to be furnished in the following format:
(Rs. in lakhs)
No. of Claims
30 days to 6 months;
6 months to 1 year;
1 year to 5 years
5 years and above
4.4 Details of payments to individuals, firms, companies and organizations in which directors are interested required to be disclosed as part of Management Report to be furnished in the following format:
Name of the Director
Entity in which he is interested
Amount of payment during the financial year (Rs. in lakhs)
The above details may be furnished as per the requirements of The Companies Act, 1956 as regards directors’ interest.
4.5 Schedule on Commission expenses
Insurers are required to furnish information relating to commission paid to agents and intermediaries as per the prescribed format. The format of the commission expenses as revised by the Authority is placed at Annexure VI.
4.6 All insurers are required to provide details of various penal actions taken by various Government Authorities as per the format prescribed at Annexure VII. A NIL report may be filed in case no penalties have been imposed on the insurer.
4.7 Treatment of the sum pertaining to the Insured
The unclaimed amounts of the policyholders/Insured’s may be on the following account:
a. Claims settled but not paid to the policyholders/insured’s due to any reasons except under litigation from the insured/policyholders
b. sum due to the insured
c. Any excess collection of the premium/tax or any other charges which is refundable to the policyholders either as terms of conditions of the policy or as per law or as may be directed by the Authority but not refunded so far
d. Cheques issued by the Insurer for settlement under “a”, “b” or “c” above and cheques have not been encashed by the policyholders/insured
The amount representing the unclaimed sum shall be disclosed as a separate line item in Schedule 13- “Current liabilities” of the Balance Sheet. Further, its age-wise analysis shall be disclosed in the format as at Annexure VIII.
It is further advised that such unclaimed sum shall not be appropriated/written back, in any circumstance, by the insurers.
4.8 Though the Notes to Accounts normally disclose a statement that Previous Year’s figures are regrouped wherever necessary, as a mere statement to this effect will not indicate the accounts which have undergone regrouping. Insurers shall clearly indicate the line item in the final accounts which have been regrouped along with reasons thereof.
5.1 All insurers are advised to furnish the returns to the Authority as per the Regulations notified in this regard. In case there is no information applicable for a particular point the insurer should indicate ‘Not Applicable’ or ‘Nil’, as the case may be, rather than deleting the said point from the Returns filed with the Authority.
5.2 The Regulations prescribe that certain points are required to be certified by a specified professional. Kindly ensure that the Regulations are followed both in letter and spirit in the said context. It should be ensured that exceptions, if any are brought out in the relevant certificate.
5.3 Insurers are advised to strictly adhere to the prescribed format and not to modify the format including introducing of new set of line items.
5.4 Items of expenses and income in excess of one per cent of the total premiums (less reinsurance) or Rs. 5 lakh whichever is higher is required to be shown as a separate line item.
5.5 All insurers are required to publish their Annual Report, as required under Section 15 of the Insurance Act, 1938 in their website.
LET’S DISCUSS SOME IMPORTANT AMENDMENTS BROUGHT BY INSURANCE LAWS ( AMENDMENT ) ACT, 2015 RELATED TO PREPARATION OF FINANCIAL STATEMENT OF GENERAL INSURANCE COMPANIES.
The Insurance Act,1938
The Insurance Laws ( Amendment) Act,2015
Accounts and balance-sheet. —
(1) Every insurer, in the case of an insurer specified in sub-clause
(a) (ii) or sub-clause (b) of clause (9) of section 2 in respect of all insurance business transacted by him, and in the case of any other insurer in respect of the insurance business transacted by him in India shall at the expiration of each financial year prepare with reference to that year,—
(a) in accordance with the regulations contained in Part I of the First Schedule, a balance-sheet in the form set forth in Part II of that Schedule;
(b) in accordance with the regulations contained in Part I of the Second Schedule, a profit and loss account in the forms set forth in Part II of that Schedule, except where the insurer carries on business of one class only of the following classes, namely, life insurance, fire insurance or marine insurance] and no other business;
(c) in respect of each class or sub-class of insurance business for which he is required under sub-section (1) of section 10 to keep a separate account of receipts and payments, a revenue account in accordance with the regulations, and in the form or forms, set forth in the Third Schedule applicable to that class or sub-class of insurance business.
(1A) Notwithstanding anything contained in sub-section (1), every insurer, on or after the commencement of the Insurance Regulatory and Development Authority Act, 1999, in respect of insurance business transacted by him and in respect of his shareholders' funds, shall, at the expiration of each financial year, prepare with reference to that year, a balance-sheet, a profit and loss account, a separate account of receipts and payments, a revenue account in accordance with the regulations made by the Authority.
(1B) Every insurer shall keep separate accounts relating to funds of shareholders and policy-holders.
(2) Unless the insurer is a company as defined in clause (2) of sub-section (1) of section 2 of the Indian Companies Act, 1913 (7 of 1913) accounts and statements referred to in sub-section (1) shall be signed by the insurer, or in the case of a company by the chairman, if any, and two directors and the principal officer of the company, or in the case of a firm by two partners of the firm, and shall be 186 [accompanied by a statement containing the names, descriptions and occupations of, and the directorships held by, the persons in charge of the management of the business] during the period to which such accounts and statements refer and by a report on the affairs of the business during that period.
(3) Where an insurer carrying on the business of insurance at the commencement of this Act has prepared the balance-sheet and accounts required by the Indian Life Assurance Companies Act, 1912 (6 of 1912), or has based his accounts upon the financial and not the calendar year, the provisions of this section shall, if the Central Government so directs in any case, apply until the 31st day of December, 1939, as if in sub-section (1) references to the calendar year were references to the financial year.
For section 11 of the Insurance Act, the following section shall be substituted, namely:— "11. (1) Every insurer, on or after the date of the commencement of the Insurance Laws (Amendment) Act, 2015, in respect of insurance business transacted by him and in respect of his shareholders' funds, shall, at the expiration of each financial year, prepare with reference to that year,
i) balance sheet,
ii) a profit and loss account,
iii) a separate account of receipts and payments, iv) a revenue account in accordance with the regulations as may be specified.
(2) Every insurer shall keep separate accounts relating to funds of shareholders and policyholders.
(3) Unless the insurer is a company as defined in clause (20) of section 2 of the Companies Act, 2013, the accounts and statements referred to in sub-section (1) shall be signed by the insurer, or in the case of a company by the chairman, if any, and two directors and the principal officer of the company, or in case of an insurance cooperative society by the person in charge of the society and shall be accompanied by a statement containing the names, descriptions and occupations of, and the directorships held by, the persons in charge of the management of the business during the period to which such accounts and statements refer and by a report on the affairs of the business during that period.".
PLEASE NOTE THAT: while preparing financial statements of Insurance Companies the provisions of Section 133 and Section 143 of the companies Act,2013 are also taken into consideration and financial statements will be audited according to applicable provisions of the Companies Act, 2013.
Register of policies and register of claims.—Every insurer in the case of insurer specified in sub?clause
(A) (ii) or sub?clause (b) of clause (9) of section 2 in respect of all business transacted by him, and in the case of any other insurer in respect of the insurance business transacted by him in India, shall maintain—
(a) a register or record of policies, in which shall be entered, in respect of every policy issued by the insurer, the name and address of the policy?holder, the date when the policy was effected and a record of any transfer, assignment or nomination of which the insurer has notice, and
(b) a register of record of claims, in which shall be entered every claim made together with the date of the claim, the name and address of the claimant and the date on which the claim was discharged, or, in the case of a claim which is rejected, the date of rejection and the ground therefor.
For section 14 of the Insurance Act, the following section shall be substituted, namely:— "14. (1) Every insurer, in respect of all business transacted by him, shall maintain—
(a) a record of policies, in which shall be entered, in respect of every policy issued by the insurer, the name and address of the policyholder, the date when the policy was effected and a record of any transfer, assignment or nomination of which the insurer has notice;
(b) a record of claims, every claim made together with the date of the claim, the name and address of the claimant and the date on which the claim was discharged, or, in the case of a claim which is rejected, the date of rejection and the grounds thereof; and
(c) a record of policies and claims in accordance with clauses (a) and (b) may be maintained in any such form, including electronic mode, as may be specified by the regulations made under this Act.
(2) Every insurer shall, in respect of all business transacted by him, endeavour to issue policies above a specified threshold in terms of sum assured and premium in electronic form, in the manner and form to be specified by the regulations made under this Act.".
Submission of returns.—
(1) The audited accounts and statements referred to in section 11 or sub?section (5) of section 13 and the abstract and statement referred to in section 13 shall be printed, and four copies thereof shall be furnished as returns to the Authority within six months from the end of the period to which they refer :
Provided that the said period of six months shall in the case of insurers having their principal place of business or domicile outside India and in the case of insurers constituted, incorporated or domiciled in India but also carrying on business outside India be extended by three months, and provided further that the Central Government may in any case extend the time allowed by this sub?section for the furnishing of such returns by a further period not exceeding three months.
(2) Of the four copies so furnished one shall be signed in the case of a company by the chairman and two directors and by the principal officer of the company and, if the company has a managing director or managing agent, by that director or managing agent, in the case of a firm, by two partners of the firm, and, in the case of an insurer being an individual, by the insurer himself 5[and one shall be signed by the auditor who made the audit or the actuary who made the valuation, as the case may be.
(3) Where the insurer’s principal place of business or domicile is outside 4[India], he shall forward to the Authority, along with the documents referred to in section 11, the balance?sheet, profit and loss account and revenue account and the valuation reports and valuation statements, if any, which the insurer is required to file with the public authority of the country in which the insurer is constituted, incorporated or domiciled, or, where such documents are not required to be filed, a certified statement showing the total assets and liabilities of the insurer at the close of the period covered by the said documents and his total income and expenditure during that period.
For section 15 of the Insurance Act, the following section shall be substituted, namely:—
"15. (1) The audited accounts and statements referred to in section 11 or subsection (5) of section 13 and the abstract and statement referred to in section 13 shall be printed, and four copies thereof shall be furnished as returns to the Authority within six months from the end of the period to which they refer.
(2) Of the four copies so furnished, one shall be signed in the case of a company by the chairman and two directors and by the principal officer of the company and, if the company has a managing director by that managing director and one shall be signed by the auditor who made the audit or the actuary who made the valuation, as the case may be.".
Provisions regarding investments of assets of insurer carrying general insurance business.—
(1) All assets of an insurer carrying on general insurance business shall, subject to such conditions, if any, as may be prescribed, be deemed to be assets invested or kept invested in approved investments specified in section 27.
(2) All assets shall (except for a part thereof not exceeding one-tenth of the total assets in value which may subject to such conditions and restrictions as may be prescribed, be offered as security for any loan taken for purposes of any investment or for payment of claims, or which may be kept as security deposit with the banks for acceptance of policies) be held free of any encumbrance, charge, hypothecation or lien.
(3) Without prejudice to the powers conferred on the Authority by sub-section (5) of section 27A nothing contained in this section shall be deemed to require any insurer to realise any investment made in conformity with the provisions of sub-section (1) of section 27 after the commencement of the Insurance (Amendment) Act, 1968 (62 of 1968), which, after the making thereof, has ceased to be an approved investment within the meaning of this section.
(1) All assets of an insurer carrying on general insurance business shall, subject to such conditions, if any, as may be prescribed, be deemed to be assets invested or kept invested in approved investments specified in section 27.
(2) All assets shall (except for a part thereof not exceeding one-tenth (10%) of the total assets in value which may subject to such conditions and restrictions as may be prescribed, be offered as security for any loan taken for purposes of any investment or for payment of claims, or which may be kept as security deposit with the banks for acceptance of policies) be held free of any encumbrance, charge, hypothecation or lien.
(3) Without prejudice to the powers conferred on the Authority by sub-section (5) of section 27A nothing contained in this section shall be deemed to require any insurer to realise any investment made in conformity with the provisions of sub-section (1) of section 27 after the commencement of the Insurance (Amendment) Act, 1968, which, after the making thereof, has ceased to be an approved investment within the meaning of this section.
28 Statement of investment of assets. — (1) Every insurer carrying on the business of life insurance shall every year, within thirty-one days from the beginning of the year, submit to the Authority a return showing as at the 31st day of December of the preceding year the assets held invested in accordance with section 27, and all other particulars necessary to establish that the requirements of that section have been complied with, and such return shall be certified by a principal officer of the insurer.
(2) Every such insurer shall also furnish, within fifteen days from the last day of March, June and September, a return certified as aforesaid showing as at the end of each of said months the assets held invested in accordance with section 27.
(2A) In respect of the Government securities and other approved securities invested and kept invested in accordance with sub-section (1) of section 27 an insurer shall submit along with the returns referred to in sub-sections (1) and (2) a certificate, where such assets are in the custody of a banking company, from that company, and in any other case, from the chairman, two directors and a principal officer, if the insurer is a company, or otherwise from a principal officer of the insurer, to the effect that the securities are held free of any encumbrance, charge, hypothecation, or lien, and every such certificate after the first shall also state that since the date of the certificate immediately preceding all the securities have been so held.
(2B) In respect of the assets forming the controlled fund within the meaning of section 27A, and which do not form part of the Government securities and approved securities invested and kept invested in accordance with section 27, an insurer shall submit, along with the returns referred to in sub-sections (1) and (2), a statement, where such assets are in the custody of a banking company, from that company, and, in any other case, from the chairman, two directors and a principal officer if the insurer is a company, or from a principal officer of the insurer if the insurer is not a company, specifying the assets, which are subjected to a charge and certifying that the other assets are held free of any encumbrance, charge, hypothecation, or lien, and every such statement after the first shall also specify the charges created in respect of any of those assets since the date of the statement immediately preceding, and, if any such charges have been liquidated, the date on which they were so liquidated.
(3) The Authority may at his discretion require any insurer to whom sub-section (1) applies to submit before the 1st day of August in each or any year a return of the nature referred to in sub-section (1), certified as required by that sub-section and prepared as at the 30th day of June.
(4) In the case of an insurer having his principal place of business or domicile outside India, the Authority may, on application made by the insurer, extend the periods of fifteen and thirty-one days mentioned in the foregoing sub-sections to thirty days and sixty days, respectively.
(5) The Authority shall be entitled at any time to take such steps as it may consider necessary for the inspection or verification of the assets invested in compliance with section 27 or for the purpose of securing the particulars necessary to establish that the requirements of the section have been complied with. The insurer shall comply with any requisition made in this behalf by the Authority, and if he fails to do so within two months from the receipt of the requisition he shall be deemed to have made default in complying with the requirements of this section.
For section 28, section 28A and section 28B of the Insurance Act, the following section shall be substituted, namely:— "28. Every insurer shall submit to the Authority returns giving details of investments made, in such form, time and manner including its authentication as may be specified by the regulations.".
Section 40 -Prohibition of payment by way of commission or otherwise for procuring business.—
(1) No person shall, after the expiry of six months from the commencement of this Act, pay or contract to pay any remuneration or reward whether by way of commission or otherwise for soliciting or procuring insurance business in India to any person except an insurance agent or an intermediary or insurance intermediary.
(1A) In this section and sections 40A, 41 and 43, reference to an insurance agent shall be construed as including reference to an individual soliciting or procuring insurance business exclusively in the territories which, immediately before the 1st November, 1956, were comprised in a Part B State notified in this behalf by the Central Government in the Official Gazette and holding a valid licence as insurance agent under the law of that Part B State.
(2) No insurance agent shall be paid or contract to be paid by way of Commission or as remuneration in any form an amount exceeding, in the case of life insurance business, forty per cent. of the first year’s premium payable on any policy or policies effected through him and five per cent. of a renewal premium, payable on such a policy, or, in the case of business of any other class, fifteen per cent. of the premium: Provided that insurers, in respect of life insurance business only, may pay, during the first ten years of their business to their insurance agents fifty?five per cent. of the first year’s premium payable on any policy or policies effected through them and six per cent. of the renewal premiums payable on such policies:
Provided further that nothing in this sub?section shall apply in respect of any policy of life insurance issued after the 31st day of December, 1950, or in respect of any policy of general insurance issued after the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950).
(2A) Save as hereinafter provided, no insurance agent or intermediary or insurance intermediary] shall be paid or contract to be paid by way of commission or as remuneration in any form any amount in respect of any policy not effected through him: Provided that where a policy of life insurance has lapsed, and it cannot under the terms and conditions applicable to it be revived without further medical examination of the person whose life was insured thereby, an insurer, after giving by notice in writing to the insurance agent through whom the policy was effected if such agent continues to be an agent of the insurer an opportunity to effect the revival of the policy within a time specified in the notice, being not less than one month from the date of the receipt by him of the notice, may pay to another insurance agent who effects the revival of the policy an amount calculated at a rate not exceeding half the rate of commission at which the agent through whom the policy was effected would have been paid had the policy not lapsed, on the sum payable on revival of the policy on account of arrear premiums (excluding any interest on such arrear premiums) and also on the subsequent renewal premiums payable on the policy.
(3) Nothing in this section shall prevent the payment under any contract existing prior to the 27th day of January, 1937, of gratuities or renewal commission to any person, whether an insurance agent within the meaning of this Act or not, or to his representatives after his decease in respect of insurance business effected through him before the said date.
(1) No person shall, pay or contract to pay any remuneration or reward, whether by way of commission or otherwise for soliciting or procuring insurance business in India to any person except an insurance agent or an intermediary or insurance intermediary in such manner as may be specified by the regulations. (2) No insurance agent or intermediary or insurance intermediary shall receive or contract to receive commission or remuneration in any form in respect of policies issued in India, by an insurer in any form in respect of policies issued in India, by an insurer except in accordance with the regulations specified in this regard: Provided that the Authority, while making regulations under sub-sections (1) and (2), shall take into consideration the nature and tenure of the policy and in particular the interest of the agents and other intermediaries concerned.
(3) Without prejudice to the provisions of section 102 in respect of a contravention of any of the provisions of the preceding sub-sections or the regulations framed in this regard, by an insurer, any insurance agent or intermediary or insurance intermediary who contravenes the said provisions shall be liable to a penalty which may extend to one lakh rupees .''
Section 40A(3) in The Insurance Act, 1938-
Limitation of expenditure on commission.—
(3) No person shall pay or contract to pay to an insurance agent, and no insurance agent shall receive or contract to receive, by way of commission or remuneration in any form, in respect of any policy of general insurance issued in India by an insurer after the commencement of the Insurance (Amendment) Act, 1968, and effected through an insurance agent, 4[an amount exceeding fifteen per cent. of the premium payable on the policy where the policy relates to fire or marine insurance or miscellaneous insurance.
1. Section 40A(3) has been omitted.
2. For Sections 40B and 40C of the Insurance Act, the following sections shall be substituted, namely:— "40B. No insurer shall, in respect of insurance business transacted by him in India, spend as expenses of management in any financial year any amount exceeding the amount as may be specified by the regulations made under this Act;
3. 40C. Every insurer transacting insurance business in India shall furnish to the Authority, the details of expenses of management in such manner and form as may be specified by the regulations made under this Act.".
Section 40B in The Insurance Act, 1938
Limitation of expenses of management in life insurance business.—
“expenses of management” means all charges wherever incurred whether directly or indirectly, and includes—
(i) commission payments of all kinds,
(ii) any amount of expenses capitalised,
(iii) in the case of an insurer having his principal place of business outside India, a proper share of head office expenses which shall not be less than such percentage as may be prescribed of the total premiums (less re?insurances) received during that year in respect of life insurance business transacted by him in India, but does not include in the case of an insurer having his principal place of business in India any share of head office expenses in respect of life insurance business transacted by him outside India.
For Section 40B of the Insurance Act, the following sections shall be substituted, namely:— "40B. No insurer shall, in respect of insurance business transacted by him in India, spend as expenses of management in any financial year any amount exceeding the amount as may be specified by the regulations made under this Act;
Section 40C in The Insurance Act, 1938
Limitation of expenses of management in general insurance business.—
(1) After the 31st day of December, 1949, no insurer shall, in respect of any class of general insurance business transacted by him in India, spend in any calendar year as expenses of management including commission of remuneration for procuring business an amount in excess of the prescribed limits and in prescribing any such limits regard shall be had to the size and age of the insurer:
Provided that where an insurer has spent as such expenses in any year an amount in excess of the amount permissible under this sub?section, he shall not be deemed to have contravened the provisions of this section, if the excess amount so spent is within such limits as may be fixed in respect of the year by the Authority after consultation with Executive Committee of the General Insurance Council constituted under Section 64F, by which the actual expenses incurred may exceed the expenses permissible under this sub? section.
For Section 40C of the Insurance Act, the following sections shall be substituted, namely:—40C. Every insurer transacting insurance business in India shall furnish to the Authority, the details of expenses of management in such manner and form as may be specified by the regulations made under this Act."
IMPORTANT PROVISIONS OF COMPANIES ACT,2013 TO BE KEPT IN MIND
SECTION 133 OF ACT,2013
The Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
Provided that until the National Financial Reporting Authority is constituted under section 132 of the Companies Act, 2013 (18 of 2013), the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in consultation with and after examination of the recommendations made by National Advisory Committee on Accounting Standards Constituted under section 210A of the Companies Act, 1956".
SECTION 143: POWERS AND DUTIES OF AUDITORS AND AUDITING STANDARDS.
143. (1) Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor and amongst other matters inquire into the following matters, namely:—
(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading:
Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all I ts subsidiaries and associate companies] in so far as it relates to the consolidation of its financial statements with that of its subsidiaries and associate companies.
(2) The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.
(3) The auditor’s report shall also state—
(a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
(c) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
(i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls;
(j) such other matters as may be prescribed.
(4) Where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification, the report shall state the reasons therefor.
(5) In the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor General of India shall appoint the auditor under sub-section (5) or sub-section (7) of Section 139 and direct such auditor the manner in which the accounts of the company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company.
(6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit report under sub-section (5) have a right to,—
(a) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct; and
(b) comment upon or supplement such audit report:
Provided that any comments given by the Comptroller and Auditor-General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub section (1) of section 136 and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report.
(7) Without prejudice to the provisions of this Chapter, the Comptroller and Auditor General of India may, in case of any company covered under sub-section (5) or sub-section (7) of section 139, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.
(8) Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the company’s auditor) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country and the duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor, if any, shall be such as may be prescribed:
Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.
(9) Every auditor shall comply with the auditing standards.
(10) The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority:
Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards.
(11) The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein.
Provided that until the National Financial Reporting Authority is constituted under section 132, the Central Government may hold consultation required under this sub-section with the Committee chaired by an officer of the rank of Joint Secretary or equivalent in the Ministry of Corporate Affairs and the Committee shall have the representatives from the Institute of Chartered Accountants of India and Industry Chambers and also special invitees from the National Advisory Committee on Accounting Standards and the office of the Comptroller and Auditor-General.
(12) Notwithstanding anything contained in this section, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed:
Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed:
Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed.
(13) No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith.
(14) The provisions of this section shall mutatis mutandis apply to—
(a) the cost accountant conducting cost audit under section 148; or
(b) the company secretary in practice conducting secretarial audit under section 204.
(15) If any auditor, cost accountant, or company secretary in practice does not comply with the provisions of sub-section (12), he shall,—
(a) in case of a listed company, be liable to a penalty of five lakh rupees; and
(b) in case of any other company, be liable to a penalty of one lakh rupees.
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